Why Does Google Have Two Separate Classes of Common Stock?

As an investor evaluating Google‘s parent company Alphabet for possible inclusion in your portfolio, you may have come across references to two distinct tickers – GOOGL and GOOG. Why does one company have two different common shares available, and what sets them apart?

In this comprehensive guide, we‘ll unpack the rationale behind Google‘s unconventional capital structure, compare the features of its Class A and Class C share offerings, and discuss investment implications for your portfolio.

Overview – Why Google Has Dual Classes of Stock

Google‘s founders Larry Page and Sergey Brin implemented a dual-class stock framework shortly before the tech giant went public in 2004. This structure established:

• Class A Common Shares – Available on public markets, these conferred 1 vote per share to holders
• Class B Common Shares – Restricted only to Page, Brin and other insiders, these wielded 10 votes per share

The rationale was straightforward – enable raising widespread capital from public markets while still protecting leadership‘s decision-making capacity over the long run. By letting insiders retain super-powered votes, Google could focus on market-changing innovation free from Wall Street pressure or shareholder revolts.

In the 10+ years since its founding, Google has leaned on this dual-class framework to transform from merely a superior search engine to a revolutions in mapping, mobile operating systems, digital advertising, cloud services and beyond. Maintaining an operational buffer between external shareholders and internal business strategy has aided that metamorphosis tremendously.

But the direction hasn‘t always been universally applauded by individual investors like yourself. So let‘s break down what exactly you should know about Google‘s multi-class shares as you research owning a piece of this tech giant.

The Rationale Behind Google‘s Dual-Class Stock Structure

Google established a multi-class voting structure in part due to other tech companies‘ challenging experiences with public listing.

Founders Page and Brin had watched once-small enterprises like Dell, Microsoft and Intel evolve from bootstrap operations into massive blue chips as hungry investors poured in capital. With massive market caps came big shareholder personalities angling for ever-bigger payouts each subsequent quarter. Leadership increasingly needed to satisfy short-term profit motives rather than pursuing sometimes risky, long-view innovation.

Page and Brin felt strongly that algorithmic search was still just in its infancy in 2004 when Google went public. Immense opportunities awaited in adjacent spaces like mobile OS, mapping, communications, and intelligent automation. They built Google not just to topple early search rivals, but to unlock access to information globally in unprecedented ways over the coming decades.

But the public spotlight has capsized many high-flying tech visionaries‘ grandest ambitions after IPO day finally arrives. Both Page and Brin expressed hesitations about losing their company‘s quintessential identity to a faceless, profit-hungry investment community.

Hence to avoid pressure, they developed a multi-tiered structure that reserved exceptional control for themselves and a trusted inner circle:

• Class A Common – Available widely to public, these had just 1 vote per share
• Class B Common – Restricted to founders and insiders only, these conferred 10 votes per share – thus maintaining majority sway over business decisions

This allowed Google‘s legendary leadership to protect the power to take risks and swing big for the fences. Even if public investors flipped shares day-to-day and quarterly results wavered, Page, Brin and core team could stick to their long-term mission. Dual-class stock also prevented hostile takeovers from activist short-sellers looking for quick returns.

Over its first decade-plus as a public company, maintaining insulation from external shareholders has allowed once-tiny Google to now oversee an unprecedented empire encompassing:

• Search
• Mobile Operating Systems
• Digital Advertising And Analytics
• Cloud Services
• Communications Tools
• Self-Driving Vehicles
• AI And Machine Learning

Very few public companies in history have faced the intense scrutiny, regulation and shareholder pressures Google has weathered while continuing to deliver exceptional innovation, profits and stock growth. The dual-class voting structure stands as a key enabler.

The 2014 Creation of Non-Voting Class C Shares

For its first 10 years as a public company, Google operated with just the original Class A and B share structure.

But on March 27, 2014, the company underwent a stock split to establish a 3rd class of shares – Class C common stock. Whereas all pre-IPO investors and public shareholders until that point held just 1-vote Class A shares, the stock split distributed an entirely new non-voting Class C share to all existing shareholders.

If on the record date of March 27, 2014 you held 10 shares of Class A Google stock, you would have woken up the next day with:

• 10 Class A Shares – Conferring 1 vote each, same as before
• 10 Class C Shares – Newly issued, non-voting

Crucially, this move sought to continue incentivizing employees and early shareholders while enhancing leadership‘s control even further. By issuing a new class of non-voting common stock to all existing public shareholders, Google ensured Page and Brin could:

• Pursue risky new projects without worrying about scrutiny
• Maintain voting control exceeding 50%
• Issue boatloads of additional equity to compensate workers or fund acquisitions without worrying about dilution

After all, distributing Class C shares to existing Class A holders represented a zero-sum transfer. And any new public offerings would consist only of non-voting Class C shares.

Since that split, all of Google‘s acquisitions, fundraising rounds, and public secondary issuances have involved Class C stock. For example, when Google purchased AI leader DeepMind in 2014 for $500+ million, that compensation consisted heavily of Class C shares. This approach will continue allowing Page and Brin significant autonomy over Alphabet‘s trajectory for years to come.

Key Differences Between Google‘s Class A, Class B and Class C Shares

Now that you understand the history and motivations behind Google‘s capital structure, let‘s compare the features of its 3 share classes:

A few key implications stand out:

• Most individual investors can only purchase Class A or Class C shares on public exchanges; Class B remains restricted
• Class B‘s disproportionate voting power ensures Page, Brin and other insiders retain control
• You‘ll sacrifice voting rights entirely if you invest solely in Class C shares

Below is a more detailed feature comparison:

Class A Common Shares

• Ownership – ~15% of total common shares, widely available to public investors and institutions
• Voting Power – 1 vote per share; collective Class A voting power around ~43% currently
• Trading – Listed publicly on NASDAQ exchange as GOOGL
• Benefits – Voting rights; preferential ownership treatment if dividends ever issued
• Risks – Lower trading volumes and liquidity vs. Class C

Class B Common Shares

• Ownership – Constitutes <15% of total common stock but maintains majority control
• Voting Power – 10 votes per share enable 57% insider sway
• Trading – Founders‘ shares cannot trade publicly
• Benefits – Disproportionate influence over business decisions
• Risks – Total stake constantly declining as Class C‘s rise

Class C Common Shares

• Ownership – Constitutes 70%+ of Google‘s common stock, mostly from recent issues
• Voting Power – Confers zero votes in shareholder meetings
• Trading – Listed publicly on NASDAQ exchange as GOOG
• Benefits – Higher trading volumes and liquidity vs. Class A
• Risks – No influence over governance decisions

Two implications stand out:

1. Class A shares confer just 1 vote each, but far fewer trade publicly than Class C shares. Hence Class A holders possess stronger proportional voting interests.

2. Class C makes up 70%+ of total common stock, sow huge trading volumes make shares highly liquid. But zero voting ability means relinquishing any governance influence.

Now that you understand Google‘s motivations for employing multi-class stock and the key differences in available share classes, let‘s discuss implications for your investment decisions.

How Google‘s Capital Structure Impacts Your Investing Approach

As an individual investor, you‘ll need to make an informed choice under this multi-class framework about what matters more:

• Pure financial upside
• Influence over governance

There are strong cases for choosing one or the other:

Benefits of Owning Google‘s Class A Voting Shares

• Greater proportional sway over voting – 1 Class A share carries more relative heft than 1 Class C share
• Preferential rights to dividends, though none have been issued historically
• Arguably better instrument for activism if you want sway

Benefits of Owning Non-Voting Google Class C Shares

• Higher trading volumes facilitate easier entrance and exit
• Viewed as a "purer" tech play by some investors
• Cheaper than Class A shares in absolute per-share prices

As with any investment decision, it comes down to aligning with your personal priorities.

Do you want to just surf positive momentum in Google‘s stock price with no responsibility over the direction? Non-voting Class C shares might provide an optimal vehicle with exceptional liquidity.

Or do you have strong feelings about things like Google‘s system architectures, fragmentation risks, regulatory vulnerabilities or growth opportunities that you want to press as an activist owner over the coming decades? Your views may merit lobbying for Class A voting shares instead.

Neither approach is inherently "right" or "wrong" – just be honest about what you expect from your investment. Blindly purchasing any security without contemplating your role as part-owner masks risks.

If you fall into the set of investors that want financial upside exposure without worrying about governance, Class C may indeed offer advantages like improved liquidity too. Just know that you‘ll remain a passive price-taker rather than active business decision-maker under that route.

Conclusion – Key Takeaways About Google‘s Share Classes

Google‘s foundations were laid by visionaries intent on building something revolutionary not just for 2004 but to unlock access globally for decades to come. Its exceptional crossover from scrappy search engine to mobile OS giant to AI trailblazer stems hugely from leadership‘s insulation from fickle investment whims.

Maintaining differentiated share classes with disproportionate insider voting control has empowered significant risk-taking in adjacent opportunities. Oversized ambition requires room to maneuver free from typical public company constraints.

As an investor now evaluating participating in Google‘s future upside, you need to carefully weigh financial return prospects versus governance influence. Do you prioritize:

• Pure price exposure and liquidity advantages of non-voting Class C shares?
• Protecting voting rights for potential activism albeit at lower volumes with Class A?

Neither seat at the table is fundamentally "better" – just aligns differently with ownership priorities. Regardless of your choice, recognizing how multi-class structures like Google‘s concentrates power is vital for informed capital allocation.

By establishing founder protections early and reinforcing them with subsequent share authorizations, Google has retained an unparalleled capacity to rapidly expand into ambitious new product segments. Love or hate the direction, leadership owes zero explanation to outside investors as they pilot Alphabet‘s future.

Public shareholders thus assume a purely opportunistic role as Google Class C owners in particular – ride positive momentum but relinquish influence. Only by purchasing Class A shares can individuals weigh in on governance matters.

Evaluate your investing priorities and risk tolerances accordingly if considering Google for your portfolio. Its multi-class approach warrants just as much due diligence as financial metrics alone.